Why Your Local Redbox Kiosk Just Disappeared

Don't be surprised if you're walking into a store and see an empty space where a Redbox machine used to be. Outerwall (OUTR) -- the parent company behind the once popular disc-renting kiosks -- is starting to scale back its operations after years of growth.

It was a rough second quarter for Redbox with just 169.3 million rentals of DVDs, Blu-rays, and video games. That may seem like a big number, but it was 9.3 percent lower than the tally a year earlier.

Outerwall blames Hollywood for supplying them with weak films. The new movies hitting the DVD and Blu-ray market during the period rang up 37.5 percent fewer ticket sales in North America during their theatrical runs than those released in the second quarter of 2013, and box office is a big driver for Redbox rentals. Nobody wants to rent what nobody wanted to see at the multiplex. Things were particularly hard for the month of June when just four major releases hit the video market.

There could also be a bigger trend in play here. Redbox was the welcome beneficiary of Blockbuster's demise and Netflix's (NFLX) move to shift emphasis to its popular streaming platform. Former Blockbuster fans, or those who were upset by Netflix's choice to sell its DVD and streaming offerings separately fell into the waiting arms of Redbox's automated kiosks. However, now that the post-Blockbuster gains have been absorbed, and the period of Netflix defection has subsided (the number of Netflix disc subscribers has fallen by more than half to 6.3 million) there's no more easy growth to be had for Outerwall's fleet of Redbox machines.

Another sign that the issue isn't just a bad few months of movies is that Outerwall now expects to close out the year with as many as 700 fewer Redbox kiosks in operation in the U.S. market. The net reduction of 500 to 700 machines may not seem like a lot for a company with more than 42,000 kiosks in operation. That's less than 2 percent of its stateside empire, but it could be the beginning of the end.

Shrinking your footprint isn't something you do if you think the slide in rentals was a fluke. We're streaming more content, and while the company formerly known as Coinstar has a Web-based media play, it wouldn't be a surprise if keeps closing more kiosks in the future if demand continues to dry up.

In the meantime Redbox is also entertaining a rental price increase later this year. It's hard to endorse that decision at a time when rentals are slipping -- but at the same time it's also hard to fault Outerwall for trying to milk the most that it can out of its DVD rentals while watching films on those discs is still something that people do.

Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends Netflix. The Motley Fool owns shares of Netflix. Try any Motley Fool newsletter service free for 30 days.